REGULATORS TURN UP HEAT ON ASSET MANAGER RISK.
Regulators on both sides of the Atlantic are turning up the heat on asset managers following a new report from the US questioning the risk posed to the stability of the financial system by fund management firms and moves in the UK to increase scrutiny of the sector.
The report from the Office of Financial Research (OFR), a body created by Dodd-Frank to help the Financial Stability Oversight Council (FSOC) spot risks that could de-rail the financial system, concludes that asset management firms are, “vulnerable to shocks” and may need greater oversight of their capital, leverage and liquidity holdings. According to the OFR, asset managers could pose risks to the financial system, for example, when they buy or sell stock in herds, exaggerating market movements, or they increase leverage.
FSOC has already set a precedent for extending its traditional regulatory reach beyond the banks. AIG, the insurance group, and GE Capital, the finance arm of GE, have already been brought under the regulator’s watchful eye, having been declared “Systemically Important Financial Institutions” or SIFIs. An appeal by insurer, Prudential Financial, against SIFI status recently failed.
Although the OFR report has stopped short of recommending that asset managers become the subject of greater regulation, the body has called for more information from the industry on areas such as on the types of assets, exposures and leverage used in managed funds as well as more data on securities lending and collateral arrangements generally. It also noted that, unlike the UK, US firms are not required to maintain liquidity or capital reserves or appoint chief risk officers.
However, asset managers in the UK have not escaped regulatory scrutiny and they have their own regulatory issues to contend with, as Deborah Prutzman, chief executive of The Regulatory Fundamentals Group, observes. “Systemic risk posed by investment funds is not just a focus in the US,” she says. “UK regulators have recently zeroed in on whether hedge funds are ready to fall as interest rates rise.”
In June a report from the Financial Policy Committee, the Bank of England body monitoring systemic risk in the UK, called for an investigation into the effect of a rise in interest rates on UK financial institutions. In particular, the FPC argued that financial hedge funds are especially vulnerable to an interest rate rise. Like its counterparts in the US, the FPC is now gathering more information on which to conduct a risk assessment.
“Precisely where the chips fall on systemic risk oversight is yet to be seen,” says Prutzman. “But what is becoming obvious is that the regulators, on a worldwide basis, are beginning to marshal their arguments that some segments of the asset management industry should be brought into the fold.”
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